If you’ve formed an LLC but haven’t done business this year, you may be wondering if you need to pay the Delaware franchise tax. Here’s what you need to know.
What Is the Delaware Franchise Tax, Again?
Franchise “Tax” is often misinterpreted to mean that the fee will be calculated based on profits or capitalization, but that is not the case with Delaware LLC franchise tax. It may be better understood as a flat “maintenance fee” for the privilege of having the legal protections of an LLC in Delaware. The State of Delaware requires every LLC that is registered in the state to pay a flat fee of $300 each year to remain in Good Standing, regardless of business activity.
How Much Is the Delaware Franchise Tax?
All LLCs, Limited Partnerships, and General Partnerships formed or registered in Delaware are required to pay an annual franchise tax of $300 due June 1. This is a flat fee that is not calculated based on company revenue.
Delaware corporations are required to file an annual report and pay franchise tax by March 1 each year. The minimum corporate franchise tax is $175 using the default Authorized Shares Method and can increase if the corporation has a large number of authorized shares. The Assumed Par Value Capital Method can be used to calculate corporate franchise tax and starts at $400.00. Assumed Par Value method may lower franchise tax for those corporations with a large number of authorized shares and/or shares with a higher par value.
Nonprofit 501(c)(3) organizations and other exempt domestic corporations owe $25 each year on March 1.
The late fees for franchise tax are $200, plus 1.5% interest per month. This fee is assessed by the state automatically.
Why Do I Need to Pay the Delaware Franchise Tax?
If a company fails to pay franchise tax, it will eventually lose its good standing. This is important to understand because a lapsed/void LLC will expose its members to personal liability they would otherwise not have if they paid franchise tax on time. It is also important to pay franchise tax if the company wants to avoid the much costlier process of Renewal and Revival of an LLC that the Secretary of State has declared void.
When Is the Delaware Franchise Tax Due for LLCs?
Franchise tax starts the year after you form your LLC. It is due on or before June 1 of every year. Failure to pay the tax will result in a $200 penalty in addition to the tax, plus interest and immediate loss of Good Standing status, so it’s important to pay the tax by the due date. You may also pay franchise tax for the year at any time before the tax is becomes due. If the LLC goes two years without paying state franchise tax, the company will automatically go void. The company will require a costly renewal/revival if the Members decide they want the business to continue under the same name. A renewal/revival is also the only way to keep the same formation date.